Muni broadband: The gift that keeps on taking

Steven Titch (@stevetitch), founder of Expert Editorial Inc., is recognized internationally as one of today’s top telecommunications journalists and analysts. Titch has been telecom and IT policy analyst for the Reason Foundation since 2005. He formerly was a senior fellow at the Heartland Institute and managing editor of Heartland's InfoTech & Telecom News. He has published research reports on municipal broadband, network neutrality, universal service and telecom taxes. Titch holds a dual Bachelor of Arts degree in journalism and English from Syracuse University. He lives in Sugar Land, Texas. He burns off energy running 5K and 10K races and likes to mellow out in cellar jazz bars.

LUS Fiber, the municipal broadband system in Lafayette, La., last month received another warning from city auditors, an advisory that appears to have become an annual thing.

Although losses were anticipated during the initial five years of offering retail services to customers, management should carefully monitor the financial results of operations of the communications system. The projections calculated by operating and finance management should be compared to actual results on a regular basis and appropriate measures should be taken to minimize any significant negative variances. Additionally, management should continue to enhance its market strategy in order to increase its revenue base.

Lafayette’s auditors voiced similar concerns in their reports the last two years. In 2012, they punctuated it with a calculation that the $140-million system was costing the city $45,000 a day.

Now, after six years of operation, prospects aren’t much better. The city’s financial reports, provided by a source in Lafayette, show that for the fiscal year ended Oct. 31, 2013, LUS Fiber reported $23 million in operating revenues, compared to $36.7 million that was forecast in its feasibility study. The system incurred a $2.5 million operating loss for the year. According to the original plan, this was to be the point where the operation swung to a profit of $902,000.

The most staggering number, however, is LUS Fiber’s deficit, which stood at $47 million at the end of October, up from $37.1 million the year before.

LUS officials have been trying to put a smiling face on this by noting that the operation is cash-flow positive, which simply means that LUS Fiber is taking in more than it’s spending on a day-to-day basis, but does not factor in its enormous long-term debt liability. They’ve also tried some sales gimmicks, like doubling the amount of bandwidth capacity for an additional $5 a month. This deal goes for everyone except low-income customers, for whom provision of quality high-speed service was a major justification for LUS Fiber’s creation. They remain stuck with a 3 Mb/s connection, about a quarter to a fifth of the speed you now get from cable.

Officials also continue to assure Lafayette residents that profitability, like a Cubs pennant, is just one more year away, and that there is robust subscriber growth ahead. Yet it’s time to seriously question this proposition in light of broadband business trends. Cable customers have been turning to wireless and video on demand for video programming. Citing data from the ISI Group, an equity research firm, BusinessInsider.com reported that nearly 5 million cable TV subscribers cut the cord in the last five years, and that the number of cable TV-only subscribers remaining could sink below 40 million (see graph below).

True, in many cases you still may want a landline broadband connection to get Netflix or Amazon Prime, but the triple play business model—phone, cable, Internet—looks like it’s toast. Like the cable industry, muni broadband operations like LUS Fiber bet their entire long-term viability on triple play. Phone’s been gone for years. Cable TV is going. Commercial cable companies are scrambling to deal with this market shift, and muni operations are in the same boat. The difference is that, with private companies, the cost falls on shareowners. For municipalities, the cost is paid by taxpayers. In Lafayette, the meter stands at $47 million

What’s distressing is that today, when the turmoil in the service provider market is so measurable and visible, there are still cities and towns—Westminster, Md.; Princeton, Mass.; Vallejo, Calif., to name three I found here—think that municipal broadband is a sound idea.

For an in-depth look at the challenges municipal broadband faces, see my case study of LUS Fiber,downloadable here.

Muni broadband: The gift that keeps on taking was last modified: June 3rd, 2014 by Steven Titch